Now that the second quarter of 2020 is closed, and the worst impacts of Covid-19 on financial performance appear to have been recorded, there are opportunities. New business development lenders have been sitting on the sidelines and are tired of their basements and their home offices. Those lenders are used to booking new deals and they want to do that now! Their bosses want them to start closing new business!
We are six months away from the end of 2020, and even with Covid-19, business needs to get back to business. Lenders are lending money.
Why are there refinance opportunities now?
FMG has been busy during the second quarter of 2020 helping businesses plan for recovery and managing working capital and cash as the business returns to its new normal. We are seeing opportunities and successes.
The impact of Covid-19 has forced many businesses to reduce operating costs and use working capital management practices they previously would not employ. Reducing expense run rates and improving the operating cycle and cash management has provided needed improvement in some borrower’s financial performance. Deal fatigue means the incumbent lender is not interested in staying involved, but the challenges of Covid-19 certainly helped drive home the need for changes and the future performance of the borrower will be improved.
Some lenders have evaluated their portfolios by industry sector and are reducing or eliminating lending to specific industries. As a result of these decisions, there are performing companies with adequate collateral bases that are looking for new lenders. Even in troubled industries there are companies that can be refinanced.
What does this mean for special assets management?
This is a perfect opportunity for special assets managers to review their portfolio and identify borrowers they would like to exit their bank. Taking a more aggressive approach to asking borrowers to source new lending faster helps.
Who are good candidates?
Borrowers with the ABL collateral, and especially if reserves have been built up during the period in special assets, are great candidates for refinance. ABL lenders are willing to overlook Covid-19 impacts for solid collateral and satisfactory performance.
Borrowers in tough industries that are performing at a reasonable level, and can show they made good changes to improve performance during Covid-19 impacts, have a great story to tell about responding to challenges in difficult times.
Borrowers who have been able to continue performance levels even under Covid-19 impacts are also interesting targets for new lenders. Some industries and some companies within industries experienced less impact and are posting continuing performance levels.
A few examples
A borrower in the food processing sector was anticipating over advances under an ABL facility as a result of the Covid-19 impact on the way consumers purchased food which impacted demand for different products in different ways. Vendors were pushing for payment and customers were slowing down payment. The borrower took our advice on working capital management, and worked with vendors and clients to not balance everyone’s working capital problems on the back of the borrower. The borrower also took advantage of government programs and worked through some less desirable inventory. This borrower is a great example of a company in an impacted industry who took advantage of working capital management best practices and is emerging stronger.
A borrower in the consumer products sector immediately reduced its overhead costs by cutting some staff, utilizing senior management pay reductions, and renegotiated rents. The borrower determined a way to maximize new products and develop its ecommerce delivery methods. Using these techniques costs were reduced, new products were offered, and new “subscribe and save” type services were implemented. The company is still recovering while the phased return to the new normal occurs across the country, but the company will be well positioned to return to business with potential for even better performance.
A borrower in the agricultural sector made use of the various Department of Agriculture programs, and took the time to improve financial reporting capabilities. As a result of loan paydowns and a better ability to report financial results and forecasts, this borrower is positioned to refinance.
What can a lender do?
This is a time when speed is important.
Get out in front of the financial reporting for June 30, 2020. Make sure it comes in as quickly as possible.
Look at that financial information and consider the information you have gathered from the borrower about its PPP loans, its tax deferrals, and other government programs. Identify companies that have used the programs to conserve cash and improve performance.
If you have a borrower with some “meat on the bones” in terms of cash flow, working capital management, collateral, performance improvement, these are the borrowers that new lenders are looking for today.
There is an ability for some lenders to stretch on structure or increase rates to offset risk in an effort to bring in new business.
The business development officers need your borrowers in order to meet their goals for new loans.
We can help review a borrower’s prospects for refinance and work with you to develop strategies to put a borrower in a better position for refinancing.